Raising the Issue of New Issue CMBS TALF
As the Federal Open Market Committee met this week and determined it would begin slowing down its Treasury purchases, an emerging consensus within the securitization industry is instead calling for an extension rather than an easing of a particular liquidity program. The Federal Reserve initiated the Term Asset-Backed Loan Facility (TALF) program to stimulate lending by allowing private investors to purchase securities with a matching government investment. The reach of the program into commercial mortgage-backed securities (CMBS) aimed to aid price discovery and provide liquidity for the commercial mortgage market, which faces a credit crisis of its own. The TALF facility set up for legacy CMBS received bids for nearly $670m in July, but the new-issue CMBS TALF facility experienced a slower start. Industry sources agree there will be a growing emphasis on whether the Fed will extend the legacy and new-issue CMBS TALF facilities into 2010. Craig Lieberman, managing director at NewOak Capital and a co-head of commercial real estate there, says the new issue branch will need the extension. "With no news of conduit origination and only single borrower deals in the pipeline, it appears to me that the deadline for TALF-eligible new issue CMBS is going to have to be extended in order for it to have any positive impact," Lieberman says in market commentary. "Given that most banks have yet to staff back up and the time that it takes to originate, underwrite and securitize a commercial mortgage loan, I think that it's unlikely that we'll see any traditional new issue fusion transaction come to market before next year." He adds, "In order for the program to achieve its desired outcome, it should be extended into next year, and should probably be done sooner rather than later." Lisa Pendergast, a managing director at Jefferies & Co., agrees it's ikely the Fed will extend the new issuance TALF program for CMBS, which is newer, hasn’t seen as much traction yet and addresses the credit fundamental concerns in the market. She tells HousingWire the legacy CMBS program, on the other hand, has already improved the standing of holders of CMBS securities as it has tightened spreads in the secondary CMBS market dramatically. “The legacy program is creating transparency as to where new-issue CMBS bonds may clear," she says. "Moreover, it certainly stabilized spreads at tighter levels and more importantly helped the balance sheets of CMBS investors who bought these bonds new issue at substantially tighter spreads. In some cases, these bonds were purchased at par, fell to a dollar price of $50, and have rebounded since to $90." The tightening in CMBS spreads has improved the performance of CMBS portfolios, which ultimately positions CMBS investors to better support a new-issue CMBS market when it arrives. “The challenge to the Federal Reserve," Pendergast concludes, "is to try to stimulate the origination of commercial mortgages, keeping in mind the many challenges posed by the sector, including a lending environment in which credit fundamentals continue to deteriorate and the almost impossible task of efficiently hedging a pool of commercial mortgages during the aggregation stage prior to securitization." Pendergast also says the Fed may see the way that spreads have tightened so far and decide it has done its job and should allocate resources to where there’s more pain to address, such as new commercial real estate lending. The risk in such a scenario, of course, is spreads may gap back out in the absence of a legacy CMBS TALF facility. Write to Diana Golobay.